Is Due Diligence Really Possible When it Comes to ICOs?

We already know there’s more to ICO investing than meets the eye. You don’t need an economics degree to participate (a crystal ball would be more useful). But you can make smarter investing decisions by carrying out due diligence first.

What is Due Diligence?

Seasoned investors use this term all the time, but if you’re new to the game, it may only sound faintly familiar. Due diligence is basically about putting in the necessary background research before backing a horse in the race. It includes checking out your ICO’s team to assess whether their idea has real commercial potential (and that they don’t look like they’ll jet off to the Cayman Islands after the raise). 

And, of course, you’ll want to avoid buying a shitcoin.

However, due diligence in the crypto world is often akin to guesswork, since the majority of ICOs have no prior operations, financials, audit controls, or documentation to assess. Moreover, individual investors often lack funds or knowledge of VC firms.

Scott Amyx, Managing Partner of Amyx Ventures (an industry building-venture fund for new technologies) warns, “To compound the issue, we’re not dealing with accredited investors [ . . .] When retail investors and unsophisticated one-off individuals buy into ICOs, they are taking a major risk because they lack the sophistication, net worth or cash flow to manage the loss of their principal.”

He should know. As an internationally recognized thought leader, VC, speaker, IBM IoT futurist, and author on exponential technologies and the Fourth Industrial Revolution, Mr. Amyx knows a thing or two on the subject.

“ICOs, as you can see, lack the rigor, transparency, sophistication and rarely meet the stringent criteria for a sound investment. Hence, unless investors are VCs, institutional hedge funds or accredited investors, they are feeding into the frenzy hype without the ability to vet the opportunity.”

Want to Invest Anyway? Take These Tips

If you’re getting excited by marketing hype and FOMO’s keeping you up at night, don’t say you haven’t been warned. You may not have the same resources at your disposal as a VC firm, but you can still exercise caution and make your own plan for due diligence.

When the financial and legal due diligence are impossible to complete, run your own basic checks. According to Amyx, here are a few things you should do:

Background Due Diligence

You probably won’t find any reports or analysis on the company, but look into the industry and see what state it’s in. The smart money right now wouldn’t be on a declining industry with finite resources, so make sure the ICO you’re backing has a viable future.

Find out if there are any SEC filings of companies within the same operating space. You could also check for press releases or articles that have been published in trade journals or industry-specific magazines.

Business Due Diligence

While you may not be able to run a complete background check on the smiling faces staring out of the website before you, why not conduct a basic search? Yeah, you could use Google or LinkedIn, but those profiles could be fake. It would be smarter to pick up the phone and speak to a team member, or see if a customer list is available and try calling around.

It’s Not The Winning That’s Important

To borrow the words of Baron Coubertin, and at the risk of being bullied on Twitter, “The most important thing in the Olympic Games is not winning but taking part.”

So take part. Just don’t invest more than you can afford to lose.